Got medical debt? Your credit score may no longer take a hit thanks to these changes

In the past year, the three major credit bureaus have made big changes concerning medical collections. Equifax, TransUnion and Experian have deleted approximately 70% of medical collections from consumer credit reports.

In July 2022, credit bureaus stopped adding new, unpaid medical collections to credit reports until those debts are one year old. And as of April 2023, medical collections under $500 no longer appear on consumer credit reports.

Collection accounts can damage your credit score, even after you pay or settle the debt. So if you have had medical collection tradelines on your credit report, this likely comes as good news.

Read on to discover why the credit bureaus have decided to remove so many medical collections from consumer credit reports. You'll also gain insight into how these credit report changes might have affected your credit score.

What medical debt collection looks like in the United States

Millions of American adults struggle with medical debt and the negative impact those obligations can have on their credit scores.

Unfortunately, medical collections can make it difficult (and sometimes impossible) for people to access new financing when they need it. Medical collections on credit reports might even make it harder for some people to land a job.

Below are several eye-opening statistics that explain the problem of medical debt in the U.S.:

• One in three American adults has medical debt.
• Most medical collections on credit reports are for debts under $500.
• 58% of all third-party collections on credit reports were for medical debt in 2021.
• Two-thirds of medical debts stem from a short-term or one-time medical expense (not a long-term pattern of bad credit behaviors).

Related: How to check your credit score for free

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Why have credit bureaus removed 70% of medical collections?

Consumer credit reports and credit scores provide credit card issuers and lenders with a lot of valuable information. These tools help lenders and others predict risk, and that can help keep the cost of credit at a more affordable level for people with good credit.

When negative information appears on your credit report (e.g., collection accounts and late payments), lenders may feel that doing business with you is a bigger risk. Even a medical collection on your credit report could damage your credit score and make it harder to qualify for financing.

Credit scores predict the likelihood that you'll pay a credit obligation 90 days late or worse over the next 24 months. Yet research (PDF link) from the Consumer Financial Protection Bureau (CFPB) shows that medical collections may be less effective at predicting future credit behaviors.

People with paid medical collections on their credit reports are less likely to make late payments than those with the same credit score. Per the CFPB, these consumers should have credit scores that are around 20 points higher, on average. Therefore, it seems that medical collections may not be as accurate at predicting future defaults compared with other types of collection accounts.

Billing errors are also common with medical bills, and patients are the ones who pay the price when mistakes happen. Even if a medical collection on your credit report comes from a billing error, it could still drive your credit score downward. And if you've ever had to play go between with a billing department and a medical insurance provider, you know how difficult it can be to get these billing mistakes fixed.

Because of the problems such as those mentioned above, the credit bureaus have been under pressure for years to update credit reporting practices. And the COVID-19 pandemic has only made medical debt issues more pressing for many people. As a result, all three credit bureaus announced medical credit reporting changes to "help people across the United States focus on their financial and personal wellbeing."

Related: How to correct errors on your credit report

Will your credit score improve?

If a credit bureau removes a medical collection from your credit report, there's a chance that your credit score may improve. Yet how much improvement you see (and whether your credit score increases at all) depends on several factors.

Let's say you have a credit report that's clean other than a few small medical collections. If a credit bureau removes those negative medical debts and you're left with a credit report containing only positive information, you might see a meaningful bump in your credit score. People who see recent medical collections removed from their credit reports might also experience more upward credit score movement. (New negative accounts tend to hurt your credit score more than older derogatory items.)

On the other hand, if an older medical collection comes off your credit report, the impact of the removal might not be as significant. And if a credit bureau removes a medical collection but there's still other negative information on your credit report (e.g., late payments, charge-offs and non-medical collections), you might still have a bad credit score after the adjustment.

You can use the free FICO Score Estimator to get an idea of how the removal of a medical collection might impact you personally.

Related: 6 things to do to improve your credit score

Bottom line

Equifax, Transunion and Experian have implemented major changes to how medical debt will be included on consumer credit reports. The shift may be good news for consumers with medical collections, but it's still important to work hard and keep your credit in the best shape possible across all factors.

As you improve your credit, you may be able to enjoy many financial benefits, including a chance to qualify for the best credit cards available and the perks that come with those lucrative offers.

Additional reporting by Emily Thompson.